Against the broader fundamental backdrop, the case for Penn National Gaming (NASDAQ:PENN) should be decidedly bullish. Primarily, the novel coronavirus pandemic that devastated the service and tourism industry has significantly faded from the peak, which is a huge positive for PENN stock. As well, government bodies scaling back their Covid-19-related mitigation protocols is a much-needed lifeline for the gaming industry.
But whatever positivity that PENN stock carried into this year, it’s already given back and then some. On a year-to-date basis, Penn National shares are down 18% but that doesn’t tell the whole story. Since closing at a high of $136.47 in mid-March, the equity unit finds itself down more than 51%, which is a staggering change in tone.
Naturally, analysts will point their finger at the delta variant of the SARS-CoV-2 virus, which continues to be a thorn on the side of global leaders. As a recent CNN report revealed, Covid-related hospitalizations and deaths are on the rise, the vast majority of cases involving unvaccinated individuals. While no one can say anything for certain, the resurgent crisis raises the specter of reupped mitigation efforts.
Of course, that’s not what stakeholders of PENN stock want to hear. After a crisis-plagued year in which the underlying company suffered a more than 32% decline in annual revenue, combined with a net loss of $670 million, Penn National — indeed, the entire service and tourism industry — is anxious to make up for a lost year.
But that might not happen if the delta variant truly gets ugly. While such an outlook may not be likely given that over 68% of U.S. adults have had at least one shot of the Covid vaccine, the broader market is certainly worried about the potential economic impact.
How then should investors respond?
PENN Stock Needs a Revaluation Based on Reality
First, I think it might be useful to keep things in perspective. While the market suffered a sizable hit, reflecting a sharp pivot from robust bullishness just a few days prior, we can’t quite say for certain how the pandemic will play out.
I’m not an epidemiologist so I’m not going to make any calls. But based on the fact that Americans have gone through this for a roughly one-year period, a return to preventative measures likely isn’t going to be a shock to the system.
That said, PENN stock hasn’t reacted well to the circumstances. Over the trailing week from July 19, shares are down 8.5%. And over the trailing month, shares have dropped almost 13%. Irrespective of the delta variant, Penn National has not been able to spark positive momentum.
A look into the company’s Form 10-Q may reveal why. For the first quarter of 2021, Penn generated revenue of $1.27 billion, up 14% from the year-ago quarter. That’s reasonably encouraging except for one small detail: the food, beverage, hotel and other segment (which I’ll abbreviate as FBH hence forward) at sales of $192.9 million was down 9.5% year-over-year.
Of course, because of the pandemic and its lingering effect, the FBH segment was much smaller in 2020. But in 2019, FBH accounted for over 19% of total revenue with segment sales reaching slightly over $1 billion.
Thus, the fact that FBH sales were declining in Q1 2021 relative to the year-ago quarter is worrisome, suggesting that society’s recovery is taking longer than predicted. Could Q2 results be better? Almost surely but to what degree?
Looking at visitor statistics for Las Vegas, in 2019, Sin City attracted an average of 3.54 million people a year. As of May 2021, visitor volume is 2.9 million. Unless this stat picks up significantly, it’s hard to imagine that PENN stock will improve in the near term.
Q2 to Provide Some Answers
Nevertheless, at some point, you’ve got to figure that PENN stock will be an attractive value play. For one thing, you have the favorable legislative environment for sports betting. Also, if the Covid resurgence turns out to be more of a paper tiger, then the recovery narrative will be back on again.
However, Penn National must get as many tourism dollars as possible as other companies are equally desperate to get their businesses going. Therefore, the company’s Q2 earnings report will be crucial, with analysts eyeballing the FBH segment.
Should we see a significant improvement, PENN stock could be a strong buy. If not, we may have to reassess the situation one more time.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
